Amazon rides upstream on accounting fluke
By Al Lewis
Denver Post Business Editor
Sunday, January 27, 2002 - Amazon.com is the Internet bubble that refuses to pop. Last week, the headlines screamed and the sound bytes blared: "Amazon reports first-ever profit."
Analysts crowed that the Internet model was slowly proving itself. And wild-eyed investors drove the online retailer's long-battered stock up 42 percent for the week by Friday's close to $14.44 a share.
They say doctors regularly over-prescribe antidepressants. Maybe that's the explanation. Times are tough, so everyone on Wall Street is taking happy pills.
We are reeling from a recession that began when the very promise that Amazon represents failed to materialize. It's been one tech-wreck after the next, and by now the fallout has darkened almost every sector of the economy.
The layoffs keep coming, the Enron debacle gets uglier every day, corporate accounting practices are increasingly under fire, and what have we learned?
Almost nothing if we believe Amazon is profitable.
Amazon boasted a fourth-quarter profit of $5.1 million, or one penny per share. These earnings are so thin they could have been manufactured in the accounting department by delaying some expenses. But there are many other perfectly proper accounting tricks.
As part of its calculation, Amazon logged a $16.3 million noncash gain, related to Europe's ever-weakening currency. Apparently, the plunging new euro made Amazon's massive European debts much cheaper to service. The savings were booked as a fourth-quarter gain. Without this unusual boost, Amazon would have posted an $11.2 million loss.
This is perfectly legitimate accounting. Still, I'm wondering how many times Amazon can score in the currency market. Right now, no one is predicting another profit. In fact, Amazon says to expect a loss in the first quarter.
I think of Amazon as a mighty river of losses and debt. The Seattle-based wonder has lost nearly $3 billion since it went public in 1997 and it has racked up nearly $2.2 billion in debt. Including its alleged fourth-quarter profit, Amazon posted a 2001 loss of $567 million.
Its stock fell 78 percent in 2000 and from there it fell 26 percent in 2001. Stockholder equity is negative $1.4 billion.
What is amazing about Amazon is that a lot of people figured it would be bankrupt by now, but here it is at ground zero of the tech-sector's nuclear blast, alleging profits. In this holocaust environment, even profits from currency fluctuations are miraculous.
To be sure, things are improving. So what if Amazon lost more than half a billion bucks in 2001? Beats the $1.4 billion it lost in 2000. Or the $720 million it lost in 1999.
Founder Jeff Bezos has just bought more time. Fourth-quarter revenues are up 15 percent to $1.1 billion. He says, no guarantees, but Amazon hopes to achieve positive cash-flow in 2002. That would keep the lenders and investors happy as Amazon continues to expand sales. As part of the sales growth plan, Amazon is offering discounts and free delivery.
That's the problem with Internet retailing. As soon as you start selling a product online, it becomes a commodity, and as soon as it becomes a commodity, everyone wants the lowest price.
The only way to make money on minuscule margins is to have gigantic sales volume. And the best way to get gigantic sales volume is to keep lowering prices.
It's a game that can be won. Just look at Wal-Mart. And it can be lost. Just look at Kmart.
For now, Amazon deserves adulation only because it's still alive. But it isn't profitable. And for all anybody knows, it may never be.
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Denver Post business editor Al Lewis' column appears Sundays. He can be reached at 303-820-1306 or alewis@denverpost.com. |
